The Libyan conflict is not only causing tens of thousands of deaths, destroying a society, and wiping out a state. It also is spilling over into neighboring Tunisia, destabilizing its internal equilibrium, redefining cross-border interactions, and affecting all neighboring countries in the Maghreb.

Since the uprising against President Muammar Qaddafi in March 2011, Tunisia has seen a vast influx of Libyan refugees. Cars, decrepit vans, and trucks packed with families sitting among bundles of belongings, suitcases, and mattresses stream into Ras Jedir and Dhehiba – official border crossings in southern Tunisia.

According to the former Tunisian Minister of Commerce, the country hosts around 1 million Libyans—equal to nearly 10 percent of the Tunisian population. Libya’s crisis and the ongoing entry of Libyan refugees into the country has resulted in unprecedented social, economic, and security challenges to Tunisia. Despite these difficulties, Tunisia has thus far maintained an open border policy toward Libyans and Libya’s Egyptians seeking respite from the violence in Libya—a decision that’s been praised by UN officials and Western diplomats.

Tunisia bears the brunt of the economic and social spillovers of the Libyan civil war. The 43-mile border (Ras Jedir in Libya and Ben Guerdane in Tunisia) has become a smuggling route for goods, oil, and arms, but also for anti-regime armed groups and terrorists. Moreover, the conflict next door has exacerbated inter-communal conflicts raging within Tunisia domestically.

Despite the fact that the total voter turnout for the Committee of Sixty was low — a modest 1.1 million total voters according to the HNEC — it could still change. The Committee’s biggest challenge is to find a way to regain the people’s confidence and guarantee the public’s participation in the drafting of the constitution. It could do that by:

As Libya faces numerous challenges with the existence of federalists and militia groups, the question of decentralization grows in urgency. Libyans need to bolster local government in an effort to leave their past behind and meet their everyday needs, but lack the adequate legal and constitutional framework to ensure better governance. As Libya struggles to fill the remaining seats in the Constitutional Committee, it must also consider the language it plans to adopt to protect the decentralization process.

The move towards local governance emerged during the 2011 revolution when local councils arose to handle city affairs, an arrangement that continues today. Libyans welcomed the change. With the former regime centralized in Tripoli, citizens traveled inordinate distances from all over the country to complete tasks that they could have handled in their own cities, including basic bureaucratic services like stamps and signatures that could easily have been provided in other cities.

In December 2011, Libya’s National Transition Council announced it would spend $8 billion on a disarmament, demobilization, and reintegration (DDR) program to help militia members disarm and transition to civilian life.

I’ve been following this all with great interest, largely since, before I came to CIPE, I was working exclusively on supporting implementation of DDR programs, albeit in Africa’s greater Great Lakes region. What has been increasingly striking to me is how my DDR past and my CIPE present are meeting.

The Libyan government says it expects that at least a third of their demobilized combatants will be hired by the public sector, primarily by the army and police. A few months later, the interim Prime Minister also announced that the government would pay unemployed former rebels for the year they fought, and that rebels who are now students would receive financial grants.

But there are two issues here that I see. One is that DDR programs themselves rarely go quite as planned. Ideally, they serve to create time for peace, taking enough young men out of armed life so that instability decreases and space for development increases. If they work really well, they may provide some ex-combatants with new skills and alternative sources of livelihood, pride, and status that encourage them to stay in civilian life.

However, in reality it is difficult to fully realize either of these goals. The logistics are hard enough – imagine figuring out how to pay thousands of people throughout a country with little infrastructure. Or developing a registration and verification system that will ensure ex-combatants – and only ex-combatants – receive benefits.

Then there are the political dimensions. Militia leaders often want to transform their military clout into political influence once the fighting is over. The period before DDR is full of jockeying and number games over personnel and what will happen to them. Some commanders may keep their fighters from disarming while they negotiate for a place in the future government. Once disarmament begins, they may encourage as many of their men as possible to enter the army or police to become a power base for the future. Commanders will even sometimes “recruit” additional people to register as combatants and increase their “footprint” and leverage even further.

Sure enough, thus far Libya’s DDR experience mirrors several of these dynamics. The first thing many militia commanders did after Qaddafi was overthrown was to delay demobilizing their groups while they negotiated for cabinet positions. Payments were suspended in April after officials discovered that, by some reports, over 450,000 people were paid, even though there are at most 250,000 militia members. If this is true, that means there were at least 200,000 cases of fraud.

Which brings us to the second issue I see as I watch Libya, which is that DDR cannot happen in a vacuum. Even if it is going perfectly it is not enough. In several countries in Africa’s Greater Great Lakes Region where I or my colleagues worked, many ex-combatants came out of DDR programs with allowances, new vocational training and start-up kits. But they could not find jobs. This was not necessarily due to the training – although certainly its quality could vary – but because there were few jobs to find. Economic absorption, as they call it, was extremely low. Starting businesses was almost as difficult. Markets and supply chains were inadequate, and sustainable development was taking much longer than anybody expected.

As I now watch Libya, it seems to me that there is a danger of something similar happening. DDR in Libya is not working well enough to absorb frustrated young fighting men as it should be and some militia leaders apparently still have full or partial command and control of their forces. Indeed, DDR itself may well fail if the broader economic environment is not addressed. The public sector cannot hire every single ex-combatant, and many of those initially absorbed into national security forces ultimately will not be qualified to be soldiers or policemen. Sooner or later they will need something else to do.

And beyond combatants, there are thousands of young civilian men and women who are not eligible for DDR and also need jobs and dignity.

Long-term stability and prosperity in Libya will require a much broader-based, sustainable, and inclusive approach that complements DDR – one that addresses the economic needs of all citizens, ex-combatants included, and creates opportunities that Libyans can access based on merit, rather than identity.

Critical to this approach will be support for small and medium-sized enterprises (SMEs), which must be major engines for job creation and economic growth in Libya. The International Finance Corporation reports that, on average, 29 percent of formal GDP in low-income countries is generated by SMEs. This is particularly true in countries with political and civil instability, where Shari Berenback of USAID recently remarked that, “private enterprise is an important stabilizing force.” And note that this statistic only speaks of formal income. In the Middle East, unregistered businesses contribute even more, well above that 29 percent.

Unfortunately, all too often in post-conflict situations, SMEs lose out on both ends: donors tend to focus on micro-enterprises, while local banks are unwilling to risk giving the small-scale loans SMEs often need, or they are not structured to do so. (For more about this, see Gayle Tzemach Lemmon’s recent working paper on entrepreneurship in post-conflict situations.) For aspiring women entrepreneurs, the challenges to access can be even greater. Cultural factors come into play, as do administrative ones – women often do not hold the deeds to land, for example, and so banks are even less willing to lend them money.

Faced with these and other barriers, many SMEs end up going into the informal sector, meaning they do not register their businesses. Without legal identity, their owners and employees are often invisible and voiceless. If they are abused they cannot go to court, they cannot easily participate in policymaking or join associations, and their taxes do not support national services, along with a host of other costs.

The key, then, will be for Libyan reformers and their international partners to not just focus on helping small business owners, but also on building an environment for small business. Bank financing thresholds, property rights, tax laws and incentives, bankruptcy regulations – these may not be sexy, but they are vital to fostering tolerance for risk and innovation, both among banks and investors, and among aspiring entrepreneurs. Who will start a business if failure and debt mean ending up in jail? How can a bank lend money to a person without legal property, presuming that bank is willing to lend money to a small business or aspiring entrepreneur at all?

With elections coming up in Libya in late June, it’s the right time to ask these and a host of other questions. Systems and institutions that are inclusive, transparent and fair will go a long way to fostering the kind of job growth that all Libya’s young people need to have a bright future, ex-combatants included.

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The CIPE Development Blog provides coverage of the Center for International Private Enterprise and its partner network at work -- highlighting successes, drawing out lessons from failure, and exploring the broader issues of political and economic development. For more information visit CIPE.org.